Importance of manager selection while making investments

A common investor typically does not pay attention to importance of manager selection while making investment decisions. These investments are typically in fixed income or equities either through mutual fund or insurance ULIP. If the right due diligence is not done, the investment could result in sub standard returns.

A few of the common questions any investor should ask:

1. Consistency of past returns. This can be determined by taking quarterly returns for the last 2 years atleast and comparing them to the benchmark the investor is most familiar with. e.g. for equities, it could be Sensex and for debt, it could be Bank FDs.

2. View on the asset class: Investor needs to ask why he is putting money in the asset class. Will he make money in the near future? Is the asset class expensive or cheap? in case of equities, what is the valuation (this can be figured out by going to www.nseindia.com, click on indices and go to statistics tab). PE below 10 is cheap while more than 18 is expensive for India.

3. Volatility of returns: Are the returns volatile? more or less? this can be found out by calculating standard deviation of the returns. On can take historical NAV of the fund, calculate daily returns, and then calculate standard deviation.

4. Stability of the investment team: The team which is managing the investment function and the fund manager who will manage the particular scheme, is he there for long? Typically the team should be there for more than 2 years. This can be found out by either going to factsheets available on the fund house website or looking for addendums on the fund house website or simply calling up the fund house and asking the questions.

More later..

Indian equities on 20th Feb 2009

Market opened 2% lower and kept there only.

Yesterday we were speaking to one of our managers and he mentioned that US seems to be stabilising (latest edition of economist also says so http://www.economist.com/finance/displaystory.cfm?story_id=13145616) but Europe is a worry as bad news has started increasing. So there could be one more panic before we reach the bottom.

If this is true, my view of market bottoming at earlier lows might not hold.

The pattern of fall at 3000, 4000 and 5000 of Nifty level is similar. It starts with a panic and then retracement and then slow fall. Currently, we are falling slowly from 3000 Nifty level. Will it bounce bank from earlier lows of 2200 of Nifty, I really dont know. Indian valuations are not expensive any more, but not cheap either.

Indian debt on 19th Feb

At last the debt market has started moving.. At last, RBI Governor indicated that impact of global slow down is severe on India and there is a room to cut rates. Given this news, the Gilts started edging up.

However, I still get surprised that debt market, which is primarily dominated by institutional investors look for such cues. If one talks to a few businessman on the street and assumes that Government and Central bank will do their bit, rate cuts are evident. The question could be how much and when..

If we believe that the slowdown is unprecedented and not seen by most of the people in their careers, then experience based view is irrelevant. Ideally, we should touch historical lows at some point of time.

Obviously given the gains made in the last few months, the new lows would not happen in linear fashion. Patience could be tested..

Markets on 17th Feb

Equity and debt markets are behaving strangely. Many conflicting signals:

Vote on account budget did not do anything, equity market was disappointed. But why.. vote on account is not supposed to do anything big.. so build up of expectation was anyway wrong. my view is that market fell because of global factors..

Bigger issue is in debt.. Governments are all over the world are taking fiscal measures to prop up growth.. Obviously this is going to happen through borrowing from some body - private investors, market or straight from the central bank.. Typically, it is through the auction where investors bid.. now when the government is doing the same, the concern in India is of Fiscal deficit running high.. One thing has to happen - either higher fiscal deficit or lower spending. There are questions about where to spend and that is debatable.. in a democratic set up and in an election year, social set up will take priority

Visit to North India

I happen to visit North India last week for a family function. I happen to interact with a number of people, who are uninformed investors, to get a sense of what the general public is thinking.

Business community is going through very tough time. Most of them will loose money this year. It is even difficult to recover variable expenses, leave alone the return on fixed assets and opporutnity cost. However, in the last 15 days, things are begining to improve slightly.. it might be an indication that worst is probably over and incremental deterioration might not be there..

A retail investor is sitting on huge losses. People thought 20 -30% fall is maximum and market would bounce back. These individuals have also lost 30 - 40% and now have no interest in further investment in equities.. So going by the fear factor, we could be closer to the bottom.. but will recovery happen? ... i dont know.. but will investors make money from these levels? i think so..